Malaysia Monetary Policy January 2016

Malaysia: Central Bank maintains policy rate at 3.25%

January 21, 2016

At its first policy meeting of 2016, which concluded on 21 January, Bank Negara Malaysia (BMN) decided to maintain the Overnight Policy Rate (OPR) at 3.25%, meeting markets’ expectations. This marks the ninth consecutive meeting in which BNM had left its policy rate unchanged, after having raised it to its current level in July 2014. However, the Bank did lower the Statutory Reserve Requirement Ratio, the percentage of eligible liabilities held in reserve accounts, from 4.00% to 3.50% percent.

BNM has been forced to strike a balance between a steady outflow of capital, and an economy that is moderating. As a result, BNM opted to decrease the SRR in an effort to boost liquidity and enhance credit creation. The SRR has been at 4.00% since it was raised from 3.00% in July 2011. The lowering of the SRR is the latest in what the BNM calls its “comprehensive effort” to ensure appropriate levels of liquidity in the market. A cut in the SRR will free banks to lend more of the ringgit-denominated liabilities, which should have a positive effect on credit creation, and therefore on investment.

In the statement accompanying the OPR announcement, the BNM elaborated on the state of the global economy, noting that headwinds persisted, namely financial market volatility and uncertainty. Growth in emerging markets has slowed, and the recovery in advanced economies has undershot expectations.

At home, the Bank reiterated that domestic demand was the key driver behind economic growth in Malaysia, although private consumption has softened as higher prices, stemming from the Goods and Service Tax (GST) as well as from imported inflation, have lowered real wages. Large scale infrastructure projects have bolstered investment, despite falling capital expenditure in the oil and gas sector. The external sector’s contribution to growth is expected to be modest in 2016, as international demand remains subdued, and commodities prices are expected to maintain their historic lows.

Regarding the monetary and financial sector, inflation is expected to peak in the first quarter of 2016 as prices adjust to the implementation of the GST, and base effects from the decline in oil prices fade. Inflation is then expected to decline throughout the remainder of 2016, as low commodity prices persist. Overall, the Bank stated that inflation is “expected to be mitigated by the continued low energy and commodity prices and the generally subdued global inflation.”

The Bank summed up its statement, noting the “the stance of monetary policy remains accommodative and supportive of economic activity” and that it remains vigilant, ensuring the its policy stance is supportive of economic stability, and in line with long-run growth prospects. The next meeting is scheduled for 9 March.

The panel of economic analysts we surveyed for this month’s Consensus Forecast expect the monetary policy rate to end this year at 3.28%. Our panel expects the policy rate to climb to 3.32% by the end of 2017.

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Malaysia Economic News

Economic momentum moderated but remained resilient in the fourth quarter, with GDP growth figures beating market expectations on the back of solid private consumption growth, a pick-up in government spending and a more supportive external sector.

Industrial production rose 2.9% from the same month of the previous year in December, decelerating from the 5.0% expansion recorded in November and marking the softest year-on-year expansion in over a year and a half.

At its 25 January meeting, the Monetary Policy Committee (MPC) of Bank Negara Malaysia (BNM) decided to increase the Overnight Policy Rate (OPR) by 25 basis points to 3.25%—a move that was widely expected by market analysts.